Shareholder Value, Organizational Ethics, and. Dr. Daniel K. Saint November 10, 2009

Transcription

1 Shareholder Value, Sustainability, Organizational Ethics, and Internal Audit Dr. Daniel K. Saint November 10, 2009

2 Session Overview Introduction to Sustainability Corporate Purpose Manaus Case Study Carroll s Four Responsibilities Exercise Ethical Models for Decision Making Conclusion 2

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4 I ask what the person thinks about sustainability? If they do not know what I am talking about, the interview doesn t go any further. Darcy Winslow General Manager Women s Sports Nike

5 Sustainability and Corporate Social Responsibility (CSR) Sustainable development is meeting the needs of the present without t compromising i the ability of future generations to meet their own needs (The World Commission on Environment and Development, 1987). Triple Bottom Line new accounting model measuring Environmental stewardship, Social responsibility, and Economic prosperity. Elements of Sustainability People Labor Practices, Human Rights, Society, Product Safety Planet Materials, Energy, Water, Biodiversity, Emissions, Products Profit

6 Modern Artifacts Wall Street Journal Advertisements Approximately $3 million spent on green ads last month

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9 Four Characteristics of Companies in Trouble Pressure to maintain numbers goals and performance Fear and silence Youth and inexperience of the management team A culture of social responsibility (Jennings, Internal Auditor, 2003)

10 Corporate Purpose: Shareholder Value and Stakeholder Theory Our assumptions of corporate purpose determine what socially responsible behavior is

11 Corporate Purpose Our views on corporate purpose p set the foundation of modern financial theory and reflect the fundamental assumptions of modern economic theory Finance and accounting as language theory of social constructionism

12 Corporate Purpose The purpose p of the firm is to maximize shareholder value (shareholder value theory) This is one of the most important and topical issues of the day because of the influence of business on society and increasing demands of society on business

13 Shareholder Value Theory The language g and relationship of shareholder value is systematically embedded in business schools Primary theory of MBA finance texts Stock price maximization is the most Stock price maximization is the most important goal of the firm. (Brigham et al., 1999)

14 Theory and Practice of CSR Corporate social responsibility, stakeholder theory and firm performance are interrelated issues. (Harrison & Freeman, 1999) Stakeholder theory has emerged g as the dominant paradigm of corporate social responsibility. (McWilliams & Siegel, 2001) Intended antithesis of shareholder value maximization as purpose of the firm

15 Theory Purpose of Firm Stakeholder Theory To commercially serve broader societal interests no priority of one set of interests and benefits over another. (Donaldson & Preston, 1995) Shareholderh Theory To maximize shareholder wealth the interest of shareholders remains second to none. (Levitt, 2000)

16 Theory Dimensions Stakeholder Shareholderh Model Model Definition of CSR Corporate Behavior Marketplace Role Government Role Management Role Investment Capital

17 Manaus Case Study Based on a real story from a local company The details have been significantly modified for learning purposes

18 B R A Z I L

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20 Manaus Case Study - Background You have been asked your professional perspective on a potential ti business venture. An international ti investment company is considering an investment into Brazil. Proposal: Build an automotive manufacturing plant in Manaus Local joint venture Production to serve only the Brazilian market Due to local government incentives, alternative seen as most beneficial way to enter Brazil lowest investment, highest margin alternative.

21 Manaus Case Assumptions (hypothetical) ti No import taxes compared with high tariffs for other market entry alternatives. No air, ground or water pollution constraints for at least first ten years. No enforceable safety standards or consequences for workforce and consumers injuries. Enforced policy of discrimination women are allowed to do only the jobs not appropriate for men such as the tedious work of installing the wire in the wiring harnesses by hand. There work areas must be segregated from the men s areas.

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23 Manaus Case Study- Dialogue With no constraints on pollution, the engineering g experts calculate a significantly higher ROI if the new plant ignores environmental considerations. Should the company take advantage of the local Should the company take advantage of the local regulations? What are some points to consider?

24 Manaus Case Study- Dialogue While the government directs a policy of discrimination towards a certain class, HR experts calculate no financial impact to do so. Should this have an effect on decision making? Should this be a deal breaker? Should Consider Environment and/or HR? Should Consider Environment and/or HR? YES NO

25 Case Review In this brief case, we have considered the impact on several stakeholders of the venture: consumers, the local community, employees, and the environment. We concluded d that t business is not concerned merely with profit, but it also takes seriously its responsibilities for avoiding pollution, avoiding discrimination, providing fair employment and ensuring employee and consumer safety. We concluded that a business does have a social responsibility. Continue 25

26 Case Review In this brief case, we have considered the impact on several stakeholders of the venture: consumers, the local community, employees, and the environment. We concluded d that t business is concerned merely with profit; it has no responsibility for avoiding pollution, avoiding discrimination, providing fair employment and ensuring employee and consumer safety. We concluded that a business does not have a social responsibility. 26

27 Carroll s Four Responsibilities Business has four major responsibilities: Discretionary, Ethical, Economical, and Legal Of those four, business: Must do one, Has to do one, Should do one, and Can do one Note for following Slides: Not necessarily presented in order No wrong answers

28 Carroll s Four R s Matching Exercise Legal Must Do Ethical Have to Do Economic Should Do Discretionary Might Do

29 Carroll s Four R s Matching Exercise Legal Must Do Ethical Have to Do Economic Should Do Discretionary Might Do

30 Carroll s Four R s Matching Exercise Legal Ethical Economic??? Must Do Have to Do Should Do Discretionary Might Do

31 Carroll s Four R s Matching Exercise Discussion Legal Must Do Ethical Have to Do Economic Should Do Discretionary Might Do

32 Carroll s Four R s Matching Exercise Legal Must Do Ethical Have to Do Economic Should Do Discretionary Might Do

33 Carroll s Four Responsibilities Responsibilities of Business Social Responsibilities Economic (Must Do) Legal (Have to Do) Ethical (Should Do) Discretionary (Might Do) Source: Adapted from Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academy of Management age e Review, (October 1979), p As presented in MBA course text Strategic Management and Business Policy (Wheelen & Hunger 2002)

34 Carroll s Four R s Discussion Background academic response in opposition to Friedman justifying stakeholder theory 34

35 Shareholder Value and Economic Theory Business has no social responsibilities. Business has no responsibility for providing employment, e eliminating discrimination, avoiding pollution, ensuring consumer safety or any other popular misconceptions regarding corporate social responsibility. Business is concerned merely with making a profit. Milton Friedman

36 Shareholder Value and Economic Theory When I hear about about the social responsibilities of business that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of reformers they are unwitting puppets of the intellectual forces that undermine the basis of a free society. (Friedman, 1970)

37 Return to Manaus Case Review We concluded earlier that: Should Consider Environment and dhr? YES Should Consider Environment and HR? NO 37

38 Carroll s Four R s Discussion What does this model imply? py Responsibilities of Business Social Responsibilities Economic Legal Ethical (Must Do) (Have to Do) (Should Do) Discre- tionary (Might Do) What are the consequences of optional ethical behavior? 38

39 CFO of the year CFO Magazine in 1998, 1999, 2000 Scott Sullivan, Worldcom Andrew Fastow, Enron Mark Swartz, Tyco Award Sponsor: Arthur Andersen

40 Business Week s CEO of the Year for 2001 Dennis Kozlowski Tyco CEO of $6,000 shower curtain infamy later indicted for securities fraud and looting $600 million from shareholders

41 2004 announced $70 billion overstatement of assets executives felt compelled to increase oil reserves managed reserves to satisfy investors. Royal Dutch Shell Chairman Sir Philip Watts Knighted in the 2003 in recognition of his services to business and to the World Business Council for Sustainable Development Early last week, three days before he was ousted, Sir Philip was meeting with investors, assuring them he was not leaving, and sharing the theme of the annual meeting in May at which he was planning to speak about the problem of AIDS in Africa. (NY Times, 2004)

42 Ranked #1 on Business Ethics Magazine 100 Best Corporate Citizens List in 2004 Fannie Mae A few months later, in a damning report, the SEC ordered Fannie Mae to revise its earnings downward by $9 billion in an accounting scandal that led to the ousting of several top managers including the CEO.

43 Up to date January 2008: $7 billion in losses as a result of "rogue trades" at French bank Société Générale. March 2008: Swiss investment bank Credit Suisse announced $2.65 billion of write downs after discovering "intentional mismarkings. 2008: Lehman Brothers, Merrill Lynch, Bear Stearns, AIG, Fannie Mae and Freddie Mac 2009: European banks reveal their exposure to ex- Nasdaq chairman Bernard Madoff's alleged $50 billion Ponzi scheme 43

44 Closer to Home How many SEC investigations can you think of here in Michigan? Models

45 Open Discussion of Ethical Models for Decision i Making

46 Cavanaugh Model Gather the relevant facts Determine the ethical issues Relate to the most appropriate norms Utility Caring Rights Justice Apply the norms and make the judgment 46

47 An Ethical Decision-Making Model Clarify Decide Implement Monitor and Modify (Source: Josephson Institute of Ethics. "Five Steps of Principled Reasoning," 1999) 47

48 Personal Example True story involving teaching and Carroll s model: Responsibilities of Business Social Responsibilities Economic Legal Ethical (Must Do) (Have to Do) (Should Do) Discre- tionary (Might Do) 48

49 Conclusion Open Discussion Thoughts Questions 49

50 Jefferson Wells is a professional services firm specializing in finance and accounting, internal audit, tax and technology risk management. It is a subsidiary of Manpower. The firm has offices in North America, Europe and Asia. For more information, contact: Daniel K. Saint, PhD Managing Director Jefferson Wells Great Lakes Region 1000 Town Center, Suite 1000 Southfield, MI office: alternate saint@ltu.edu